DERIVATIVE EXPOSURE AND THE INTEREST-RATE AND EXCHANGE-RATE RISKS OF US BANKS

This article estimates the interest rate and exchange rate risk betas of 59 large U.S. commercial banks for the period of 1975-1992, as well as the bank-specific determinants of these betas. The estimation proc edure uses a modified seemingly unrelated simultaneous method that rec ognizes cross-equation dependencies and adjusts for serial correlation and heteroskedasticity. Overall, the exchange rate risk betas are mor e significant than the interest rate risk betas. More importantly, we find a link between the scale of a bank's interest rate and currency d erivative contracts and the bank's interest rate and exchange rate ris ks. particularly noteworthy is the influence of currency derivatives o n exchange rate betas.